'This Week' Transcript: David Plouffe and Lindsey Graham

PHOTO: White House Senior Advisor David Plouffe appears on This Week with Christiane Amanpour.
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(BEGIN VIDEO CLIP)

AMANPOUR (voice-over): This week, the endgame.

MCCONNELL: Our country is not going to default for the first time in history. That is not going to happen.

AMANPOUR: Now, at the 11th hour, perhaps some cause for optimism.

REID: There are negotiations going on at the White House now on a solution that will avert a catastrophic default.

AMANPOUR: With the whole world watching, the president faces his toughest challenge yet.

OBAMA: The time for putting party first is over.

AMANPOUR: ABC chief political correspondent George Stephanopoulos joins us for the inside story and the very latest, as the crisis nears a climax.

The president's top political adviser, David Plouffe, on hand with the view from the White House.

And then, Tea Party Congress at a crossroads.

MCCAIN: It's unfair. It's bizarro.

AMANPOUR: Republican Senator Lindsey Graham on the search for consensus within his own party.

Also, from Norway to Fort Hood, extremism is back in the headlines. New York City Police Commissioner Ray Kelly on the very real threat posed by radicals. And we'll take you to Mogadishu, Somalia, where ABC's David Muir is the first U.S. correspondent on the ground reporting on that country's epic famine.

ANNOUNCER: Live from the Newseum in Washington, "This Week" with Christiane Amanpour starts right now.

(END VIDEO CLIP)

AMANPOUR: Welcome to the program.

Lots to get to today, but first, some news since your morning papers. We have new developments to report on the story dominating all others, and that's the flurry of last-minute talks to raise the debt ceiling before the country runs out of money to pay its bills.

And this morning, we're hearing that there is a framework of a deal being worked on, but it's fragile.

And you can see the clock there ticking down to the Tuesday deadline.

Already we're seeing signs of mounting concern on Wall Street. The stock market plunged more than 500 points in the last week, a loss of $700 billion, or just over 4 percent of its value.

But this morning, a glimmer of hope, perhaps. For the very latest, I'm now joined by ABC chief political correspondent George Stephanopoulos.

George, you've been talking to all your sources. Are we at the edge? Or are we pulling back from the edge?

STEPHANOPOULOS: I think we're seeing the beginnings of an end game. It's good to be back on "This Week." And this is just a framework of a deal, as you said, not a final deal at all, but it's designed to get each side its bottom line.

The president gets an extension of the debt ceiling through the election, about $2.4 trillion. Congressional Republicans get the deficit reduction spending cuts that they say needs to meet that $2.4 trillion.

Here's how it would work: a trillion dollars in spending cuts right now.

Then a special congressional committee would be set up designed to report by about Thanksgiving to come up with another trillion or so dollars in spending cuts, maybe a little bit more than that.

The rub is on what happens if this congressional committee doesn't get that $1.4 trillion in deficit reduction. They're working on what they call a trigger that would guarantee spending cuts in both defense and domestic programs if this congressional committee doesn't meet the goal.

Now, the question would be, does that trigger also include revenues? Congressional sources saying no. Does it guarantee automatic spending cuts? Congressional sources saying yes. The White House saying they don't agree with that yet, which is why we're glad to have David Plouffe here, the senior adviser, who can maybe clear some of that up for us this morning.

AMANPOUR: Indeed. And joining us now, David Plouffe, the senior adviser to President Obama. So you've heard all that we've been talking about. Is there a deal?

PLOUFFE: No, there's not.

AMANPOUR: Is there a deal close, a framework? What can you tell us?

PLOUFFE: Well, I, unfortunately, can't negotiate here on your program.

AMANPOUR: No.

PLOUFFE: I think that what's clear is that pretty much both parties agree that there's going to be a first stage of deficit reduction, over a trillion dollars, that there is going to be a process, as George talked about, a congressional committee. And what that's going to work on is the items that the president was focused on with Speaker Boehner. You're not going to reduce the deficit without tax reform, without entitlement reform.

STEPHANOPOULOS: So that committee could include revenue increases, the committee, not the trigger?

PLOUFFE: The committee...

STEPHANOPOULOS: ... could consider revenue increases.

PLOUFFE: Any -- any long-term deficit reduction -- and I think the American people have spoken clearly about this, too -- if you're a middle-class family, if you're a senior citizen, you're furious that the answer to the deficit reduction by some here in Washington, mainly Republicans in the House, is to ask you to do everything. You're going to have to have closing of tax loopholes. You're going to have to have revenue produced to close the deficit.

There is -- without getting into details -- obviously, one of the things we've been focused on -- and this was part of the president's deficit reduction plan he outlined way back in the spring -- was an enforcement mechanism. So if this committee doesn't act -- and I would start by saying I think it's incumbent on leaders in both parties to appoint people to this committee who are focused on deficit reduction, who will be willing to get out of their party's comfort zone, so you can produce something that can get voted on.

But an enforcement mechanism, so that if the committee doesn't act, if it deadlocks, that there be some additional deficit reduction.

And that's obviously one of the areas that's under discussion.

AMANPOUR: So do you know think, as this is being worked on, do you think, after all this tension and stress between the parties, that there will be something that both parties can get all their members -- well, a majority to vote on?

PLOUFFE: Well, we still have some hard work to do. But it would be inconceivable that we don't. I think the American people -- you flashed the stock market decline this week. It's clear that it's hurting consumer confidence, business confidence. We have to remove this specter.

The debt ceiling has been raised dozens of times over the last couple decades. It has to be raised again. And, again, let's remember what we're talking about here. These are bills that Congress already put on the credit card. They're required to pay for them.

We all agree -- and if you're an American citizen, you should be, I think, pleased by this -- there's almost unanimity that we need to stop putting as much spending on the credit card. So the debate we're having right now is, how do we reduce the deficit? So I think that all the leaders have said, both privately and publicly, that the United States of America is not going to default. So we...

AMANPOUR: Will it happen by the deadline, though, by the August 2nd deadline?

PLOUFFE: Well -- well, that is the deadline. Our borrowing authority runs out. And so...

AMANPOUR: No short-term extensions, a few days?

PLOUFFE: Well, what -- what we've said -- and I think some in Congress have said -- if you have a deal and you needed a day or two to dot the i's and cross the t's -- but there's no reason even to do that. We have to get this done by Tuesday because it would be inconceivable for the United States of America -- the impact that would have not only on people here in this country, most importantly, but around the world would be catastrophic.

STEPHANOPOULOS: But, David, let me press you on the details here, because the details of this enforcement mechanism are all-important. This is what the whole negotiation is coming down to right now. The president has said time and time again he wants a balanced approach that includes tax reform revenue increases. Everyone I've talked to on Capitol Hill says this enforcement mechanism would not include revenue increases, would just be across-the-board spending cuts, domestic spending, Medicare perhaps, and defense, and it would not include revenues.

So if the enforcement mechanism doesn't include revenues, what incentive would Republicans have to consider revenue increases? And wouldn't it all but guarantee that the final product is all spending cuts and not the balanced approach the president wants?

PLOUFFE: Well, I will. First of all, I think the committee is going to be charged with finding significant deficit reduction. I think there's going to be a lot of focus on that committee. Certainly the work president did with the speaker is going to inform that committee. I think the American people have spoken loudly and clearly they want a balanced approach that asks something of everybody.

Now, whatever enforcement mechanism is put in place has to be strong enough to compel action. Whatever its composition, people shouldn't look at this enforcement mechanism -- at least from my viewpoint -- as, well, you should assume that's going to happen.

Because what you want -- and, you know, historically there have been enforcement mechanisms that have been strong enough to compel action -- back in 1990, the first President Bush reached agreement with Democratic leaders because there was a looming trigger that people wanted to make sure...

(CROSSTALK)

STEPHANOPOULOS: But that included revenue increases. Now you're talking about one that does not include revenue increases. Isn't that the problem?

PLOUFFE: Well, listen, we're talking about a variety of options here. But the key principle is that the enforcement mechanism has to be strong enough to compel both parties.

STEPHANOPOULOS: But let me just press this, then...

PLOUFFE: Yes.

STEPHANOPOULOS: Can the president accept an enforcement mechanism that is spending cuts only, automatic spending cuts only, that does not include revenues?

PLOUFFE: What I would say is, we would accept an enforcement mechanism that ensures that -- that compels both parties to action and also is something that we think substantively is acceptable to the country.

STEPHANOPOULOS: So you're saying there may be a way to compel action by both parties without including revenues?

PLOUFFE: Well, again, we're talking about a variety of different options here in the closing hours here about how to compel that action. I would say that the positive thing is -- I think both parties agree that you need such an action.

And exactly what the composition is -- again, we want to make sure that there's focus on this committee acting. And I think this has been a healthy debate. I think the American people understand a lot more about the deficit, about that there's no easy answers. I think it's been a healthy debate here in Washington. And I think any long-term deficit reduction is going to include revenues and smart entitlement reform.

STEPHANOPOULOS: Republicans don't agree with that.

PLOUFFE: Well, some Republicans do. First of all, I'd say most Republicans in America do. And you're beginning to see more Republican senators speak to this, that, listen, we had a deal with Speaker Boehner that obviously fell apart that included $800 billion in revenue. So I'm confident that any solution that this committee would produce that ultimately will be voted on in Congress is going to be balanced.

AMANPOUR: Frustrated members of your own party, they're basically saying, look, why doesn't the president -- who has his principles -- stand up for them, rather than spending so much time wanting to be bipartisan, a conciliator? I mean, they're saying the Republicans are driving a harder bargain. And as George has just described, the president has moved all of the way to the language and the ideals that the Republicans espouse.

PLOUFFE: Now, if you look at -- what are...

AMANPOUR: But, yes, because he wanted a clean bill, then a bill with cuts and spending, and now as George is talking about, it's -- it's all cuts for the moment.

PLOUFFE: Well, first of all, we've been clear, we need this debt ceiling increased well into the future. The spectacle in Washington this week, anyone who thinks we should repeat this again a few months down the road, I don't think there's many people in America.

So, first of all, we need a longer-term extension, because our economy cannot have this cloud over it. Secondly, deficit reduction now is going to happen in two stages. There's going to be a first stage that has cuts agreed to, largely that came out of the work the president and the vice president did, that are acceptable largely to members of both parties.

The second stage is going to be a committee that's looking into the tougher issues of entitlement reform and tax reform.

The president believes that we need to reduce the deficit. This isn't about playing on a Republican playing field. This country, our economy has to reduce the deficit, we have to live within our means. And if you're a progressive, there's a powerful case for deficit reduction, things like college loans, college scholarships, medical research, spending on things like roads and bridges that put construction workers to work, if we don't reduce the deficit in the not-too-distant future, we're not going to have room to do any of that.

So we have to live within our means. And I think the president has been clear that he is willing to do some tough things, because the only way to reduce the deficit is to get out of your comfort zone. You're not going to do it without some smart entitlement reform in the long term, but you're also not going to do it without significant tax reform.

STEPHANOPOULOS: You keep saying smart entitlement reform. Does that include Medicare cuts? Are Medicare cuts back on the table as part of this congressional committee's mandate and as part of the enforcement mechanism's mandate?

PLOUFFE: Well, again, there's various, George, enforcement mechanisms that would have different constructs. In the initial set of spending cuts, obviously, these are just domestic spending cuts, and they would be both defense and non-defense. The committee's charge then -- before we get the enforcement mechanism -- will be, how do you fill in the rest of the details? The truth is, we will have cut a lot of domestic spending. So there's not going to be much more room there.

STEPHANOPOULOS: So that drives you to Medicare and Medicaid, perhaps Social Security?

PLOUFFE: Well, and tax reform. And the president was pretty clear. He laid out -- he was willing to do Medicare reform. Our view on this is, if we can strengthen Medicare, if we can strengthen Social Security, as opposed to what the House Republicans wanted to do, which was largely to dismantle it...

STEPHANOPOULOS: But you keep talking about tax reform, and what we've just seen in the House all week long is there are not votes in the House of Representatives -- there's not a majority in the House of Representatives for the kind of package you're talking about.

PLOUFFE: Well, it's hard to get a majority of House Republicans, it seems, to even support their own plan. But here's what I'm convinced of. The shame of it is, if the, quote, unquote, "grand bargain" that the president had been working with the speaker on, I'm convinced, had that come, it would have been the easiest to get the votes for, because it would have been deficit reduction on such a grand scale that even though there was component parts in it that are really tough political votes, people would have been willing to accept it.

Well, now we're going to do it in two stage, but ultimately we need the same outcome, which is we need significant deficit reduction, $3 trillion or $4 trillion over 10 years, really begin to reduce the deficit in the years after that, and it's got to be done in a balanced way.

AMANPOUR: You keep saying it has to be done. If it's not, what is the administration going to do? I mean, the specter of U.S. soldiers fighting for this country in Afghanistan, asking their commander whether they're going to get paid is really shameful.

PLOUFFE: Yes.

AMANPOUR: What are the choices that are going to be made if this doesn't come through as you hope?

PLOUFFE: Well, it's really unthinkable. And I think the specter you raised is one of the reasons I think there's so much urgency on Capitol Hill this morning.

AMANPOUR: What are the tough choices? And what's going to be paid?

PLOUFFE: Well, first of all, our focus now is on solving this. You know, we don't have much time left, a little over 60 hours, I guess. We've got to get this solved.

And, you know, at the last hours, you begin -- people are looking for off-ramps. There is no off-ramp here. The only option is for Congress to raise the debt ceiling and to sign these initial deficit reduction savings into law.

Obviously, if Congress isn't able to act, the Treasury Department is going to have to brief people who'd affected and will obviously do that. But the focus now has to be driving towards some conclusion here.

And, listen, I think the American people are sitting at home and saying, you know, they've gone through this recession, many have lost jobs, many are working two jobs, they're helping family members who've been affected, they're furious at this.

What they're screaming -- listen, the president a couple times this week talked about compromise. And Capitol Hill was besieged by tweets, by calls, by e-mails, because the American people are fed up. They want their leaders to lead, and part of leading is compromise.

You know, George, you've worked on Capitol Hill. Any meaningful agreement has to be based on compromise, particularly when you have divided government. The American people chose divided government in 2010, but they did not choose dysfunctional government. And I think the spectacle this week has been something that's enraged Americans, and I think they're going to insist that their leaders here over the next two-and-a-half days solve this problem.

AMANPOUR: Well, we're certainly going to be watching it. David Plouffe, thank you very much, indeed.

AMANPOUR: And so, again, Capitol Hill becomes a hive of activity this afternoon when Senator Majority Leader Henry Reid brings his troops into session. We'll then begin to see how the rank-and-file are responding to the leadership negotiation.

And we're now joined by a key Republican senator, Lindsey Graham of South Carolina.

Thanks for joining us.

GRAHAM: Thank you.

AMANPOUR: As all of this goes on, we're hearing now from Minority Leader Mitch McConnell that they are working -- they're close to the parameters -- close to presenting something to their members. Is this, what you're hearing, the kind of thing that you could get on board with?

GRAHAM: Yeah, that was actually a pretty good interview. I don't know where I'm going to land, but I do believe that there is a desire by the body as a whole, Republicans and Democrats, to get this done in a way that you don't go in Tuesday with a default.

But there's a lot of history being made here. The average debt ceiling increase in terms of time since 1940 has been nine months. We're going to do 22 months, is the proposal, and $2.3 trillion.

From the Republican Party's point of view, I think we can declare victory in a limited fashion. This is the first time in my lifetime, that I know of, that we're paying for future debt increases dollar for dollar. And that would not have happened without the 2010 election, which was about the size and scope of the government.

But when you tell Tea Party folks and, quite frankly, people like me, we've won, the answer would be, wait a minute, we've changed the culture in terms of raising the debt ceiling, but in the next decade, you're adding $6 trillion to $7 trillion additional money to the debt. The government continues to grow.

So I think what we've been able to achieve is historic in terms of the debt ceiling debate, but we're not -- we're no longer running toward oblivion. We're walking toward it. And now we need to stop and turn around, go back the other way.

AMANPOUR: Every Republican congressman from your own state voted against Speaker Boehner's plan...

GRAHAM: They did.

AMANPOUR: ... even though it did contain the balanced budget amendment.

GRAHAM: Yeah.

AMANPOUR: Do you think they'll get behind this current framework that we've been describing?

GRAHAM: You know, I don't see many conservatives getting behind this, quite frankly, because you don't overall. I've learned in politics the hard way, don't oversell, and don't tell people they should feel good when they have a reason not to feel that great.

AMANPOUR: Will it pass? Will enough get behind it?

GRAHAM: I think half the conference in the Republican House must vote for this. To President Obama, to David...

STEPHANOPOULOS: Only half?

GRAHAM: I think that's the minimum, because I like John Boehner. Maybe he can get more, but it's a $3 trillion package that will allow $7 trillion to be added to the debt over the next decade.

(CROSSTALK)

STEPHANOPOULOS: But you know the politics as well as I do...

GRAHAM: So how much celebrating can you do about that?

STEPHANOPOULOS: In order to get something like this through that does not include -- it looks like this will not include revenue increases...

GRAHAM: No revenue. That's a win.

STEPHANOPOULOS: I know where you stand on that.

GRAHAM: That's a win.

STEPHANOPOULOS: That is a win. It would only get half?

GRAHAM: My belief is, what do I tell people at home who say, what did you do about getting us out of debt? I slowed down how much debt you add. Instead of adding $10 trillion, we're going to add $7 trillion. I slowed down the growth of government, but it still grows every year. For those who came out to vote in 2010 to say, get the size and scope of Washington changed in the new direction...

(CROSSTALK)

STEPHANOPOULOS: If you only get half, this could go...

(CROSSTALK)

GRAHAM: It doesn't go in the new direction.

STEPHANOPOULOS: With only half the Republican conference, this could go down.

GRAHAM: Well, I'll tell you, our Democratic friends provided no votes to John. There's no plan by the president. Harry Reid's plan is going nowhere.

AMANPOUR: But you say there's no plan, sir, but he's moved so far, in fact, entirely to your side.

GRAHAM: His -- his -- his rhetoric has moved. The reason everybody's moved in town...

AMANPOUR: But this is all spending cuts.

GRAHAM: Well, let me tell you. There's people in my party moved. There are people in my party who really are not that excited about cutting government...

STEPHANOPOULOS: You're not ready to vote for this, are you?

GRAHAM: I can't -- from -- from a big picture, I'm not ready to vote for this. And let me tell you why -- excuse me, George -- the bottom line here is, the people who got elected are not excited about being Republicans or Democrats, particularly on the Republican side. They're excited about results.

And it is fair to say, we've achieved a significant change in the way Washington works by paying for the debt ceiling increase and not passing it onto the credit card. We have not achieved entitlement change. We have not reduced the size and scope of government. We're going in the wrong direction at a slower pace, and for a lot of people, that is not winning.

AMANPOUR: You're an internationalist. We've talked before about all sorts of things like Afghanistan and other such places.

GRAHAM: Yes.

AMANPOUR: Look, you saw the soldiers yesterday -- and I asked David Plouffe this -- I mean, desperately asking their commander, Admiral Mullen, whether they're going to get paid, and he said, "I can't tell you."

GRAHAM: Well, I can. I can tell them. Here's what -- I wish I'd have been there. I would have said, not only are you going to get paid, but Admiral Mullen said the number-one national security issue facing this country is debt. And I wish we would have followed on with what we said.

If you believe that we're so far in debt we're going to become a weak country and can't afford to defend ourselves, I would have told the Marine, you're going to get paid, but by God we're going to change the reason your children will never have the American dream. So, young man, we're going to pay you, but we're going to change Washington so your country doesn't become weak and ineffective and have more debt that your children can afford to pay. That's what I would have told the Marines.

AMANPOUR: You must also worry, given your extensive connections around the world, about the way the world is seeing this country right now. I mean...

GRAHAM: I'm not worried about democracy. Here's what I would tell...

(CROSSTALK)

AMANPOUR: Not democracy. About -- they say a political system gone mad.

GRAHAM: You've got people in this country who just won a big election. They weren't kidding when they said they wanted to come to Washington to change the size and scope of the government. Then you've got people who've been there forever saying, you don't understand, you don't get it.

Well, let me tell you, I do understand: 43 cents on every dollar being borrowed, we're going to become Greece in the next 15 or 20 years. Medicare and Social Security is going to fail. So what I would tell anybody around the world, thank God these new people are here, because do you want America to become Greece? Do you want our debt instruments not to be well received throughout the country? Do you want us holding our debt, never to turn around while we're in debt to $14.3 trillion? This deal -- and it is better than a lot of people thought, but is not nearly where the problem is.

AMANPOUR: All right. Senator, on that note, thank you very much, indeed, for joining us.

GRAHAM: Thank you.

AMANPOUR: And coming up, our roundtable on the emerging framework of a deal and the big question, can it hold? We'll take up where Senator Lindsey Graham just left off. The stakes couldn't be higher for this country and the Congress and the Obama presidency. Stay with us.

(BEGIN VIDEO CLIP)

BOEHNER: I have offered ideas. I've negotiated. Not one time, not one time did the administration ever put any plan on the table. All they would do was criticize what I put out there. I stuck my neck out a mile to try to get in agreement with the president of the United States. I stuck my neck out a mile.

(END VIDEO CLIP)

AMANPOUR: House Speaker John Boehner on Friday night, a taste of the intensity that's defined the final hours of the debt ceiling debate. The speaker weathered some tough challenge this week, and now he faces a new test. Whatever deal is worked out between the Senate and the president will, of course, have to pass muster in the House, so lots of twists and turns still to come.

Joining me to chart the course, George Will, Pulitzer Prize-winning economist Paul Krugman, who's also a columnist for the New York Times, Grover Norquist, president of Americans for Tax Reform, a group that's played a major role in this debate with its no-new-taxes pledge, and once again, ABC chief political correspondent George Stephanopoulos.

Gentlemen, you just heard what Senator Lindsey Graham said, what David Plouffe, the president's adviser, said. Mitch McConnell is saying they're quite close, that he'll have the parameters of a framework he thinks to show to his members today.

Is this now going to pass? Are we going to get a deal?

WILL: I think we are. And I think it was signaled when the president spoke last Monday. That's six days ago; it seems like six months ago. But what he said was it is unjust and unacceptable to have a debt ceiling agreement that does not include revenues, that is unbalanced. The president said that after the second most prominent and powerful Democrat in Washington, Harry Reid, had proposed exactly that. He not only proposed that -- that is, an increase without revenues -- but an increase that had the other main Republican component, which was spending cuts commensurate in dollar numbers with the increase in the debt ceiling.

AMANPOUR: So it's a win?

WILL: It is a win. Now, the conservatives are saying it's imperfect, to which one must say the Sistine Chapel ceiling is probably in some sense imperfect.

AMANPOUR: Well, I don't know. Was Michelangelo imperfect? Is this imperfect? Or is it enough for you to get your people behind?

NORQUIST: Well, it avoids the two biggest challenges, and everybody goes back to 1982 and 1990. It doesn't have a tax increase in it. It appears to have real spending restraint with mechanisms to enforce it, as opposed to what happened in the past, where we had the tax increase without spending restraint. By missing those two, it moves in the right direction. Would I like to see more spending reductions? Absolutely. Are we moving in the correct direction? Yeah.

AMANPOUR: George, we've just been talking to Senator Graham and before to David Plouffe. I mean, Senator Graham extraordinarily seemed to say that it actually didn't go far enough and that he actually wouldn't be voting for it.

STEPHANOPOULOS: Said it was historic, said it was victory in a limited sense, but wouldn't be voting for it. But take a step back. And I would love to hear Paul on this, as well. You go back since this Republican majority was elected in the House in November. Since then, the Bush tax cuts have been extended. They got about $30 billion in government spending cuts in the spring. They're going towards $2.4 trillion now without any of the revenue increases the president has called for. You know, you talked to people in Speaker Boehner's House. They say this is a big, big win. And I don't know how you can deny it at this point.

KRUGMAN: No. The first thing is, we shouldn't -- you know, from -- from the perspective of a rational person -- in other words, a progressive on this stuff -- we shouldn't be even talking about spending cuts at all now. We have 9 percent unemployment. These spending cuts are going to worsen unemployment. That's not even -- it's even going to hurt the long-run fiscal picture, because we have a situation where more and more people are becoming permanent long-term unemployed. And if you have a situation in which you're going to permanently raise the unemployment rate, which is what this is going to do, that's actually going to reduce future revenues.

So this -- this thing -- these spending cuts are even going to hurt the long-run fiscal position, let alone cause lots of misery. And then on top of that...

AMANPOUR: Well, you...

KRUGMAN: ... we've got these budget cuts, which are entirely -- basically the Republicans said we'll blow up the world economy unless you give us exactly what we want, and the president said, OK. That's what happened.

AMANPOUR: You know, you've been consistent about this, saying that there should be no cuts at a time of recession and weak recovery. What is your scenario, though, once this goes through and there are significant spending cuts and no revenues?

KRUGMAN: We're looking. I mean, we used to talk about the Japanese and their lost decade. We're going to look to them as a role model. They did better than we're doing. We're -- this is going to go on -- I have nobody I know who thinks that the unemployment rate is going to be below 8 percent at the end of next year.

With the spending cuts, it might well be above 9 percent at the end of next year. There is no light at the end of this tunnel. And all the -- we're having a debate in Washington which is all about, gee, we're going to make this economy worse, but are we going to make it worse on 90 percent the Republicans' terms or 100 percent the Republicans' terms? And the answer is 100 percent.

WILL: Paul's right. We are a third of the way through a lost decade, but we're a third of the way after TARP, the stimulus, Cash for Clunkers, dollars for dishwashers, cash for caulkers, the entire range of stimulus, the Keynesian approach, which, by its own evidence, simply hasn't worked. Now Paul says double down.

KRUGMAN: Can I just say -- in advance, one important point is to make that -- is that people like me said in advance this wasn't remotely big enough. It's not an after the fact. It's not coming back afterwards.

Right from the beginning, we looked -- I looked at the numbers, people like me looked at the numbers, said we have -- we're going to have huge cutbacks at the state and local level. You've got a federal increase which is going to be barely enough to limit those cutbacks. There is going to be no net fiscal stimulus, if you look at government as a whole, which is what happened.

WILL: And it...

KRUGMAN: So here we are.

WILL: It would be good to go to the election -- electorate and have a Krugman election this time, saying, resolved, the government is too frugal. Let's vote.

AMANPOUR: President Obama has been deeply involved over the last, you know, several days, last 48 hours for sure, but it's been a very rough week for him, George. How is this going to pan out?

STEPHANOPOULOS: For a few months. I mean, first of all, the president needs a deal, because he doesn't -- he bears the consequences of default more than anyone else. Even if the public blames the Republicans more for what happened, he's got to deal with what happens in the economy.

I think at this point, the White House is hoping that, by getting a deal, he -- he can at least start to right the ship. You look at what's happened in the polling and the president's approval rating over the last couple of months. The Gallup poll has him down to 40 percent. The Pew poll, George, you and I were talking about before we came on air has him barely beating a generic Republican now 41 to 40. It's taken a real toll on the president's position.

AMANPOUR: And...

NORQUIST: Look, we've also had 50 states that have sort of played this out, as well. In the last couple of years, there have been not -- they've not been raising taxes, states like New Jersey and Michigan and Wisconsin and Ohio and Pennsylvania, major states, Texas, Florida. And what they have done is rein in spending. The states that have reduced spending and not raised taxes are doing better than the states like Illinois and Connecticut and California, which are trying to raise taxes.

AMANPOUR: Is that right, Paul?

KRUGMAN: No, it's not. We can get into statistics here -- we'd get too deep into the weeds -- but it's just not true. And it's -- let me say, by the way, on the politics of this, if you look at the polling, it turns out that the average Republican voter thinks there should be some revenue as part of this deal, right? So the president has agreed to -- not just to an agreement that's way to the right of the average American voter. It's actually to the right of what the average Republican voter wants.

(CROSSTALK)

STEPHANOPOULOS: ... he has fought here. He simply doesn't have the votes.

KRUGMAN: No, he doesn't. He has -- he has options. There are -- there are -- I'm aware of at least four possible legal routes to just regarding the debt ceiling...

STEPHANOPOULOS: You're talking about the 14th Amendment.

KRUGMAN: The 14th Amendment, Article I, the platinum coin. Do people know about the platinum coin issue?

(CROSSTALK)

KRUGMAN: You can issue -- it appears to be legally possible to...

STEPHANOPOULOS: That are worth a trillion dollars each?

KRUGMAN: ... to print -- to mint a $2 trillion platinum coin, which is ridiculous, but the whole debate is ridiculous, right? If you've got somebody who's holding the American economy hostage and trying to extort policy concessions that they could never actually pass through Congress and that they could never get past the voters, you go for whatever you can do to stop it. But he won't do that.

(CROSSTALK)

STEPHANOPOULOS: ... I think the only time the president could have done something is go back in December when Republicans were calling for an extension of the Bush tax cuts. He could have called for an extension of the debt limit then. It might not have worked, but it's when he had the most leverage.

(CROSSTALK)

AMANPOUR: I mean, that is an important question. There's nothing legally, constitutionally any way that binds the debt ceiling to the -- to the debt or the budget. Why didn't he take a stronger stance in saying, these are two separate issues?

KRUGMAN: It's what we asked on everything, right? Why -- why -- why is the president unwilling -- you know, he's...

AMANPOUR: George, he could have done it, right?

WILL: Done what?

AMANPOUR: Done that.

KRUGMAN: He always signals -- he begins every negotiation by signaling, "I'm willing to move halfway." So the other side moves further, and he moves halfway. He's never been willing to...

(CROSSTALK)

NORQUIST: He paid attention to the 2010 election. He noticed what happened. I don't think the president -- well, we know the president wasn't willing to stand up and say, "I don't care about overspending. I just want you to let me borrow more money. I don't care about overspending." He can't say that three times out loud and have a prayer in 2012.

The Republicans, they're going to take the Senate in 2012. If you look at the 23 Democrat seats up, half of them in reddish states, and 10 Republican Senate seats up all in reasonably Republican states, with the possible exception of Massachusetts, and he's got $10 million in the bank and looks great in a bathing suit. I mean, you're looking at a Republican Senate in two years. How is he going to hold on to the White House if he says he doesn't care about spending?

KRUGMAN: The 2010 elections were a run on two main themes: Where are the jobs? And Democrats are going to cut Medicare. And so Obama's response to that is, let's do stuff that's going to further reduce employment and let's -- let's give the Republicans cover on Medicare.

STEPHANOPOULOS: But look at reality. If there are 50 House Republicans that are saying we're willing to send the country into default, he just doesn't have the leverage.

(CROSSTALK)

KRUGMAN: ... if he just says no.

AMANPOUR: We're going to talk about jobs and further leverage right after a break, when we'll have more with our roundtable. But first, how will tomorrow's markets respond to today's news? We get an expert reality check. Stay with us.

(COMMERCIAL BREAK)

AMANPOUR: This week, Wall Street started to waver. With the debt deadline looming ever closer, the Dow plunged, its biggest drop in a year. The ripple effect stretched to overseas. The international markets also shaken by the climate of deep uncertainty and confusion. So what will tomorrow bring?

Mohamed El-Erian joins me from California. He's the CEO of PIMCO, the world's largest bond fund.

Mr. El-Erian, thank you very much for joining me. You have been...

EL-ERIAN: Thank you.

AMANPOUR: You've been hearing perhaps that the Senate minority leader, Mitch McConnell, feels quite optimistic that something is going to get worked out. There's a framework of a deal. How do you expect the markets to react come open time today and also tomorrow here?

EL-ERIAN: Two issue, Christiane. First, there will likely be relief, because I think this compromise will lead to an increase in the debt ceiling, and therefore avoid default. But this relief will be short. And it will be short because markets look at all the discussion not as an end in itself, but as a means to an end.

And when they look at it as a means to an end, it will not remove the threat of a downgrade. It does nothing to restore household and corporate confidence. So unemployment will be higher than it would have been otherwise. Growth will be lower than it would be otherwise. And inequality will be worse than it would be otherwise.

And, thirdly, like you said at the top of the show, the rest of the world is watching, and this will do very little to reduce the concern that the rest of the world has about the role of the U.S. in the global economy. So I expect the relief to be short-dated.

AMANPOUR: Let me ask you about the downgrade. There's obviously quite a lot of debate about not only will it happen, but if it does happen, how dramatically bad would that be for the United States? What, from your perspective, would be the effect of a downgrade from AAA?

EL-ERIAN: It will make us worse off. It's unambiguous in my mind that we have constructed both a global system and a national system based on the U.S. being a AAA. If the U.S. loses that AAA status, it will be much more difficult for the U.S. to restore growth. So it's unambiguously bad.

AMANPOUR: And how likely do you think it is to happen, the downgrade?

EL-ERIAN: We have one rating agency out there that said it would downgrade unless certain things happen, and these things are not happening fast enough. So if this rating agency, S&P, sticks to what it said, it will downgrade. Of course it's under tremendous pressure not to do so, but it has said that it would downgrade.

AMANPOUR: And in terms of U.S. economic growth, this first half has been very weak, the first quarter, even downgraded, if you like, from the estimates. What will substantial spending cuts do? Will it materially improve the outlook for U.S. economic growth?

EL-ERIAN: No, here I'm with Paul, because we have a very weak economy, so withdrawing more spending at this stage will make it even weaker, especially that this is not packaged in the context of medium-term viability. Remember, Christiane, public finance is only one of the headwinds facing this economy. We have a banking system that's not operating properly. We have a labor market that's not operating properly. And we have a housing market that's not operating properly.

AMANPOUR: All right. Thank you so much indeed, Mohamed El-Erian.

Sobering words, as you all heard. Let's bring all of you back for the roundtable discussion. The big, overarching theme here, obviously, is also to get the economy back on track and to improve this really drastically weak recovery. Paul, how is that going to happen?

KRUGMAN: I mean, my first best guess, my maximum likelihood estimates, to wear my academic hat, is it won't happen, not for years and years to come. No one is discussing the kinds of policy that might make it happen. We're waiting for the economy to heal itself, which if it's doing is doing very slowly.

AMANPOUR: Even in this situation, are there things that could be done to make people go back to work? Are there structural infrastructure work?

KRUGMAN: Well, look, if we -- there are potholes everywhere. If we actually -- you know, if there were any political willingness to just do sort of obviously needed infrastructure work, with borrowed money, then we would -- that would do a lot. But we're not going to do that.

And other than that, you know, Ben Bernanke might be able to pull a few more tricks out of his hat. And -- but it's really hard to see where this is going to come from.

AMANPOUR: So, George, if that happens and there are all these dramatic cuts and the economy doesn't improve, I mean, what does that do politically? Are people, do you think, going to blame the president come 2012? Are they going to blame the Republicans? What's going to happen?

WILL: I think they'll blame the president. It takes 2.5 percent growth annually to create enough jobs to account for the natural growth of the labor force. And the numbers we got this week...

(CROSSTALK)

WILL: ... the first quarter -- the first quarter growth of 1.9 percent was revised down to 0.4 percent, then came 1.3 percent. This is -- as we said, we're a third of way to a lost decade.

STEPHANOPOULOS: That's why this debate is so maddening. You listen to Mohamed El-Erian, and he's not alone there. On the one hand, he says, if you don't have these tremendous spending cuts, credible deficit reduction, we're going to get downgraded by the ratings agencies, that's going to be an economic disaster.

KRUGMAN: Can we say a word about the ratings agencies? Who are these guys, and why should they have this power?

STEPHANOPOULOS: They do.

KRUGMAN: And they've been wrong about everything. They were wrong about...

STEPHANOPOULOS: They were certainly wrong about the mortgage...

KRUGMAN: ... about the mortgage markets. They downgraded Japan in 2002. And -- and the result, after 19 years, is that you'd have made a lot of money if you bought Japanese bonds.

STEPHANOPOULOS: I completely agree with that, but then you turn it around, and Mohamed El-Erian says what -- on the other hand, if you make these spending cuts, the economy is going to be stuck in the -- stuck in the mud. I mean, this is a -- a paradox you just can't break.

WILL: It's not a paradox. It's a contradiction.

KRUGMAN: It's not. It's none of those. The textbook answer is spend now, cut later. Spend now and have -- have a long-term plan, work on something. The real problems for the U.S. budget are not actually even in the next decade. They're in what happens after 2020.

So if you could credibly promise to do reasonable things after 2020, while at the same time actually spending...

STEPHANOPOULOS: But that wouldn't be good enough for the ratings agencies...

KRUGMAN: But it's never going to -- it's never going to happen in the -- but that's -- it's politics. There's no economic mystery.

NORQUIST: There's been both short-term progress and long-term progress. Short-term progress is, we didn't raise taxes. We are dealing with the overspending problem, clawing it back a little bit.

Long term, we've set the precedent. We're never again doing a 1982 or a 1990 deal where we raise taxes and pretend to cut spending. We're -- and we're going to insist from now on, any time the debt ceiling goes up, dollar for dollar, spending comes down. Those two are long-term progress.

KRUGMAN: Can I ask you, by the way...

(CROSSTALK)

NORQUIST: There's a third part to the problem we face, taxes, spending. There's been a wave of regulations, both -- that have arrived and that are threatened. I think the biggest thing holding back economic growth now is the concern that next week you wake up and the EPA or some other department of government has decided not just what kind of light bulbs you have, but how big your car can be.

KRUGMAN: It's this amazing story that's come into minds, which is that the tax hikes of '82, '90 and '93 were somehow a terrible thing, a bad thing. You know, by the year 2000, we'd had a decade of very good growth. We had a surplus in the budget. All of the squandering took place after that. So those were -- the things that you say we will never again do were actually the things that put us briefly on the road to fiscal sanity.

AMANPOUR: Gentlemen, thank you very much indeed.

And coming up, the next big story. Is the face of terror changing? Should the massacre in Norway be a wakeup call for law enforcement here in the United States? I will ask New York City Police Commissioner Ray Kelly.

(COMMERCIAL BREAK)

AMANPOUR: Two troubling cases this week spotlight the threat posed by the extremists in our midst. In Texas, Army Private Naser Jason Abdo stands accused of planning another deadly attack on Fort Hood. He may have been inspired by the radical Islamic cleric Anwar al-Awlaki.

And in Norway, confessed mass-murderer Anders Behring Breivik has found some unlikely defenders on the far right of the European political spectrum. At least three politicians have come under fire for defending his extremist, anti-Muslim, anti-immigrant views.

But is violent right-wing extremism only a threat abroad? For some perspective, we turn to a man on the front lines, New York City Police Commissioner Ray Kelly.

Commissioner Kelly, thank you so much for joining us.

KELLY: Good morning.

AMANPOUR: We've all heard -- we know all the work that the U.S. law enforcement, yourself, everywhere is doing on Islamic extremism, the homegrown terrorism threat. Is there a possibility, though, that a Norway could happen here?

KELLY: Well, it's something that we have to watch closely, and we are. I think U.S. law enforcement is focused on the issue. I can tell you, in New York City, we have a task force in our intelligence division that looks at white supremacist/anti-government groups and individuals.

In fact, just a few days before the Norway massacre, we had a teleconference with our century partners -- this is 100 law enforcement agencies in the northeast quadrant of the country -- and that was the specific subject. We talked about certain groups and individuals that we're concerned about.

But it's an issue that can pop up, you know, quickly, without any advanced notice, because these individuals play their cards very closely. They don't show their hand. Just a few blocks from where you're sitting, we had a white supremacist walk into the Holocaust Museum in 2009, shoot and kill one of the security guards. He himself was shot, but clearly he had mayhem in mind.

AMANPOUR: So...

KELLY: So it is a ongoing issue that law enforcement has to continue to focus on, and I believe we are.

AMANPOUR: So can you characterize -- you've talked about threats. You mentioned one. Can you characterize some of the threats that you're hearing about, the nature of them?

KELLY: Well, there are individuals who get together and sort of follow a neo-Nazi philosophy, not unlike Anders Breivik in Norway. But they are -- they are difficult to spot. And to a certain extent, they tend to get together in rural areas. They stay away from large city centers. But in New York, we have to be concerned about something planning -- someone planning or plotting an event away from the city and it coming into New York. So we're on a lookout for this sort of thing, but it's difficult to identify.

AMANPOUR: Is it politically difficult, as well? There's obviously an infamous case of a special report on this issue, written by an analyst at the Department of Homeland Security, and because of an outcry, once it was about to be released, it was quashed. Is there a problem with trying to focus enough attention on this threat, given the sensitivities about the threat since 9/11, for instance, the Islamic threat?

KELLY: You know, I guess there are always some First Amendment issues that you have to be aware of, but I know we don't have a problem in focusing on it in New York City. We follow certain individual on the Internet. They put out their feelings quite clearly. A lot of them are careful about not advocating violence.

For instance, the individual in Norway, although he had a lot of Internet activity, did not advocate violence. He put his manifesto on the Internet six hours before he started the attacks. But so they're -- they're somewhat careful about, you know, advocating violence.

AMANPOUR: And just as we -- as we wrap up, I wanted to ask you, on this rapidly approaching 10th anniversary of 9/11, is New York, is America safer? Or are there real issues that you're still having to deal with?

KELLY: Oh, there are certainly real issues that we have to deal with. We think the elimination of Osama bin Laden was an important milestone, but not a game-changer. We're still very much at risk. We're concerned, as we get closer to the 9/11/11 memorial, because we know Osama bin Laden spoke about that date twice in the last two-year period.

So the federal government, local and state authorities, I think are very much aware of the threat and are on alert.

AMANPOUR: Commissioner Kelly, thank you very much indeed for joining us from New York.

KELLY: Thank you, Christiane.

AMANPOUR: And we want to bring you up to date on some other headlines from around the world.

Israel today is rocked by the largest protest in its history. More than 150,000 people are in the streets around the country demonstrating against high housing and food costs and inadequate health care and education. Police disbursed crowds in Tel Aviv, but there have been no reports of violence.

However in neighboring Syria today, the news is very grim. The Associated Press is reporting at least 62 civilians are dead, killed after Syrian tanks stormed the city of Hama before dawn. They're stepping up a crackdown on antigovernment protests. And this comes a day before the start of the Muslim holy month of Ramadan, where nightly protests across the country are expected to grow larger.

And in Somalia today, it is a race against time, as U.N. relief workers struggle to get help to the ravaged nation. The situation is truly catastrophic, a famine borne of skyrocketing food prices and exacerbated by the worst drought in decades and perpetuated by terrorists who use food as a weapon.

ABC's David Muir is the first American correspondent in Somalia, and he's traveling with the United Nations, and he filed this report for us from Mogadishu.

(BEGIN VIDEOTAPE)

MUIR (voice-over): We flew into Mogadishu with the U.N. this morning. They now say the crisis here in Somalia is by far the most serious food emergency in the world. And this week, as the first of the aid reached the city's capital, there was something else: a gun battle, African peacekeepers trying to protect the food and the fragile government here, firing deadly shots at Islamic militants, members of al-Shabaab, who have a grip on much of this country.

This crisis is at a breaking point. Tens of thousands have fled this country by foot, some walking more than 100 miles to neighboring Kenya, traveling what the U.N. calls the roads of death.

We traveled the perilous route, too. And then this mother, sitting beneath a tree, she was almost there.

(on-screen): And how long was her journey?

(voice-over): Ten days, she tells us.

(on-screen): These are all her belongings from Somalia?

(voice-over): Yes, she says. Her own children have run ahead to the tents that now pepper the horizon, a first sign that these refugees are nearing the camps. The children who race to keep us with us, their smiles have returned. A number of refugees swelling in the desert outskirts, so many now that the doctors have come to them.

(on-screen): This is an -- this is an ambulance?

(UNKNOWN): Yes (inaudible) ambulance.

MUIR (voice-over): They take us inside their makeshift clinic.

(on-screen): So this is the waiting area here.

(voice-over): Mothers putting their children in hanging buckets to weigh them. The hunger has now spread here beyond the most susceptible, beyond babies and toddlers. It's the older children, too.

But they say if they can just get them the nutrients, you soon see what we did. Doctors Without Borders allowed our camera into their intensive care unit at the refugee camp. We saw this little girl, her tiny bones and her sagging skin, the hospital director immediately told us he saw something else: She was sitting up for the first time.

(on-screen): She's been about her two days.

(UNKNOWN): This is the third day.

MUIR: The third day.

(UNKNOWN): Yeah.

MUIR: And you can say that she's going to be OK?

(UNKNOWN): Yes, she's going to be OK.

MUIR: Christiane, it's really something to see how quickly the children bounce back once you feed them, which is why the U.N. says it's imperative to get the food and the aid here into the capital of Somalia, Mogadishu.

There are people now coming to this city by the tens of thousands, knowing full well the danger they face in doing so. It's a sign of just how desperate they've become. We'll be traveling on the convoy today, and you can see the torrential downpours here at the airport. It's going to make the whole effort all the more challenging.

Christiane, back to you.

(END VIDEOTAPE)

AMANPOUR: David, thank you, from Mogadishu, Somalia.

And it is so hard. Be sure to watch "World News Tonight" for more of David's exclusive reporting. Viewers of "This Week" have given generously to help the people of Somalia. But as you can see, the challenges are great. To find out how you can help, visit our Web site at abcnews.com/thisweek.

We'll be right back.

(COMMERCIAL BREAK)

AMANPOUR: And now, the Sunday funnies.

(BEGIN VIDEO CLIP)

FERGUSON: We owe a record amount of money to China. And the Chinese are starting to drop little hints they might want it back. They have. Last night, I got Chinese food, and the fortune cookie said, "Where's our money (bleep)?"

(LAUGHTER)

"I don't have your money." "You get my money."

(LAUGHTER)

O'BRIEN: President Obama said that compromise has become a dirty word. Yeah. Then he told Republicans to go compromise themselves.

(LAUGHTER)

COLBERT: The debt ceiling debate drags on and on, and, frankly, both parties have been acting like children, with the Republicans saying, "Gimmie, gimmie, gimmie," and the Democrats saying, "Take it, take it, take it, just don't hit me."

(LAUGHTER)

(END VIDEO CLIP)

AMANPOUR: And we'll be right back.

(COMMERCIAL BREAK)

AMANPOUR: And now, "In Memoriam."

(BEGIN VIDEO CLIP)

SMITH: Good evening from ABC News headquarters in Washington. I'm Howard K. Smith.

REASONER: I'm Harry Reasoner in New York. These are tonight's headlines.

(UNKNOWN): And Hideki Irabu will pitch out of it.

(END VIDEO CLIP)

AMANPOUR: This week, the Pentagon did not release any names of U.S. Service members killed in Iraq or Afghanistan, and it's the first time since we began this segment that we have not had to mark the loss of any U.S. forces in those conflicts. We'll be right back.

(COMMERCIAL BREAK)

AMANPOUR: That's our program for today. Be sure to watch "World News Tonight" for all the latest on the debt ceiling negotiations. And remember, you can follow us any time on Twitter, Facebook, and or abcnews.com. For all of us here in Washington, thank you for watching, and we'll see you again next week.

END

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